Yield to maturity is the annualized return on a bond if held until it matures, combining the coupon, the purchase price, and the time remaining into one figure. It only works when the debt has a continuously quoted market price. Non-traded debt has no such price, so its return is measured differently — through AROI, based on principal, term, and expected earnings.
Yield to Maturity vs. AROI: How Debt Returns Are Measured
What Is Yield to Maturity, and What Does It Measure?
Yield to maturity is a metric that estimates the annual return on the instrument of traded debt. In case the investor decides to buy the claim at a current market price and holds it until maturity to receive the principal, yield to maturity will measure exactly these returns until the principal is repaid.
The YTM metric differs from a coupon in terms of the scale being broader. For example, a bond that proposes 5% in coupon, deriving the interest from the nominal value, will differ from the returns that are calculated by the YTM. Because the investor may buy a bond for less than its face value, and they can get both the coupon payment and capital gains on the claim. Likewise, if the investor decides to buy a claim that costs higher than its market face value, they may get diminished returns.
YTM is a metric that examines 3 parameters, including the contractual coupon, the price that the investor actually pays for the claim, and the time that the claim has before it becomes mature.
Yield to Maturity Formula: Coupon, Price, and Time Combined
The YTM formula that is simplified looks like this:
Approximate YTM = [Annual Coupon + (Face Value − Price) / Years to Maturity] / [(Face Value + Price) / 2]
The formula above accounts for the parameters like the difference between the current purchase price and the amount that will be due upon the claim’s maturity and the recurring coupon.
What is the difference between yield to maturity and coupon rate?
YTM and coupon rate differ in terms of the calculation of the values. The coupon rate, on the one hand, is calculated by taking the bond’s face value with the premise that it will not change because of the fluctuation of the market price. YTM, on the contrary, calculates the price that will be paid if the claim reaches maturity and all the timely payments are made. For example, if a bond worth €1,000 pays €50 annually, the coupon for it will be 5%. If the investor buys the bond for €950, the possibility of a higher return exists, as the investor may get both €50 of annual interest and €1,000 if the claim reaches maturity.
Is current yield the same as yield to maturity?
No, current yield is not the same as yield to maturity. Current yield is a metric that compares the annual coupon with the current market price using the following formula:
Current yield = Annual Coupon / Market Price
Current yield does not account for the difference between the price of the claim during purchase and the face value of the claim when the principal is repaid. YTM accounts for that difference and includes the calculations of the payments made to the investor before the claim has to reach maturity.
How do you calculate yield on a bond you didn't buy at face value?
To calculate the yield on a bond if the investor did not buy at face value, it is viable to use YTM. Supposedly, the investor purchases a bond for its current market price of €950, while the face value of the claim is €1,000. In this case, the coupon of 5% would give the investor €50 annually. If the claim has 4 years until it reaches maturity, then the effective YTM would be the following:
YTM = [50 + (1,000 − 950) / 4] / [(1,000 + 950) / 2]
YTM = 62.5 / 975 = 6.4%
Why Non-Traded Debt Can't Use Yield to Maturity
Non-traded debt typically cannot use the yield-to-maturity metric. YTM is dependent on the fluctuation of the market price. If there is no quoted price, the metric loses most of its value because one of the crucial components for calculation is absent.
Maclear offers claims that do not have a continuously quoted market price, and that is why YTM is not the optimal returns calculation metric. Investors may try to sell their claims early to have limited liquidity by listing them on the Secondary Market but the sale depends on demand, and it is not guaranteed. Therefore, liquidity remains strictly limited.
Because the YTM metric is not optimal since Maclear claims do not have a quoted market price, the platform uses Annualized Returns on investment, or AROI, to calculate expected returns. The formula for AROI is:
AROI = (Expected Earnings / Remaining Period) * (365 / Principal Purchased)
Coupon Rate, Current Yield, Yield to Maturity, and AROI Compared
| Metric | What it measures | What it needs as input | What it assumes | Where it breaks down |
|---|---|---|---|---|
| Coupon rate | Contractual interest relative to face value | The value of the coupon and face value of the asset | Coupon terms remain unchanged | Does not reflect purchase price |
| Current yield | Current income relative to market price | The price of the coupon and the current price of the asset | The current price is meaningful | Ignores maturity gain and loss |
| Yield to maturity | Annualized expected return on investment if the claim is held until maturity | Coupon, market price, face value, maturity timeframe | Market price exists while scheduled payments occur | Not suited to debt with no continuously quoted market price |
| AROI | Annualized expected earnings on a crowdlending claim | Expected earnings, remaining period, principal purchased | The contractual claim remains outstanding | It does not incorporate market price because none is continuously quoted |
These four figures answer different questions and are not interchangeable. Past or expected figures do not guarantee future returns; capital is at risk in both traded and non-traded debt.
A Worked Example: Similar Numbers, Different Questions
The difference between the YTM and AROI becomes clearer if an illustrative numerical example is considered. Supposedly, the investor has the same bond with the face value of €1,000 and a coupon for €50 on an annual basis. The current market price for the bond is €950, and the investor successfully purchases it for this price. The remaining term of the claim is 4 years. The YTM calculation gives around 6.4% in returns.
In case a claim with a principal of €500 is taken as a non-traded crowdlending claim, with expected earnings in interest of €15 and a period until maturity of 219 days, expected returns calculated using the AROI will be around 5%. Even if the returns look similar, the structure and the conditions of the claim are entirely different. YTM captures the bond’s market price at its current value of €950, meaning that, if the claim changes in a week, the calculated YTM would change as well. If the returns are calculated using the AROI, no market price would be accounted for, and the estimation would come from the contractual earnings, principal, and interest payments that are assumed to be paid to the investor.
Illustrative only, not a recommendation and not a forecast; the two figures measure different things, not the same return.
Comparing a Traded Bond and a Non-Traded Claim Without Mixing Up the Numbers
Yield to maturity and AROI are not two ways of expressing the same return: YTM assumes a continuously quoted market price that can change before maturity, while AROI is calculated from principal, term, and expected earnings on debt that has no quoted price at all.
A traded bond makes the investor account for the changes in the market price of the asset before the claim reaches maturity. Since the price fluctuations directly affected the calculated returns, estimations of the price fluctuations are necessary.
For a non-traded crowdlending claim where the return comes from the principal repaid upon maturity and the interest payments made regularly, the situation is different. In this case, the principal on the claim is not quoted every day since it is not tied to the market price fluctuations. The investor has to account for the fluctuations in the price when the claim reaches maturity, the principal is repaid, and there is a need to reinvest it.
For a non-traded crowdlending claim, the Secondary Market should be understood as the mechanism that provides limited liquidity through early exit. If the investor in Maclear decides to sell a claim before maturity and the buyer (another investor) is successfully found, the platform charges a 2.5% seller fee, and a 30-day buyer’s lock-up period begins.
What does yield to maturity tell you that AROI doesn't?
YTM tells the investor how a traded bond’s current market price interacts with the coupon on the claim and what period is left until the claim reaches maturity. Likewise, YTM accounts for the value of redemption. AROI does not have a continuously quoted market price and therefore shows expected returns in the contractual claim provided that the principal remains the same and the timely interest payments are made before the claim reaches maturity.
FAQ
What is the yield to maturity?
Yield to maturity shows the annual returns of the debt instrument before the claim reaches maturity, taking into account the current market price of the claim, the existing coupon, and the time until maturity.
What is the difference between yield to maturity and coupon rate?
The difference between yield to maturity and coupon rate is that the coupon rate is fixed from the face value price of the claim, while the YTM is recalculated based on the current market value of the claim.
Is current yield the same as yield to maturity?
No, current yield is not the same as yield to maturity. Current yield is a coupon divided by the current price of the asset without accounting for the time until the claim reaches maturity and the difference in the face value and the current market price.
What does yield to maturity tell you?
Yield to maturity tells the investor how much annual interest they can earn if they hold the claim until maturity at the current price. It is impossible to calculate YTM without the constantly quoted market price.
How do you compare returns across a traded bond and a non-traded P2P claim?
It is impossible to directly compare returns across a traded bond and a non-traded P2P claim. YTM and AROI are different metrics that serve different purposes. The only similarity lies only in the fact that both metrics calculate expected, not guaranteed, returns.
About Maclear
Maclear AG is a Swiss peer-to-peer (P2P) lending and crowdlending platform, headquartered in Switzerland. The company acts as a financial intermediary in the non-banking sector and is a member of PolyReg SRO, in accordance with Swiss financial regulations, particularly regarding AML, KYC, and GDPR. Maclear provides individual and qualified investors access to carefully selected business loan opportunities, with integrated risk assessment, a Provision Fund, and a Secondary Market for liquidity.
The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. Peer-to-peer (P2P) lending and crowdlending investments carry a risk of partial or total loss of capital. Past performance does not predict future results. Liquidity on a secondary market is not guaranteed. Readers are encouraged to conduct their own research and consult qualified advisors before making any financial decisions. The availability of products and services may be restricted in certain jurisdictions.